What happens when an insurer fails and applies for insolvency protection under bankruptcy?

Bloomberg reported that UnitedHealth Group, Inc., the largest U.S. health insurer, reported second-quarter results Tuesday showing expanded membership as it moved away from the Affordable Care Act and added customers mainly in the government funded programs for the elderly and poor: Medicare and Medicaid.

UNH largely exited the Obamacare exchanges going into this year, after racking up losses selling policies to individuals last year. UnitedHealth’s Medicare and retirement unit, which sells private health plans to seniors, increased revenue by 17 percent to $16.7 billion, and added 935,000 people, the company said in a statement available only to Bloomberg Professional Services subscribers.

UNH's employer (ASO/PPO/HMO) and individual unit revenue declined 4 percent, after the insurer’s pullback from Obamacare. UnitedHealth had 540,000 customers in the individual market, down from 1.5 million a year earlier.

While my healthcare provider clients complain about paltry fee schedules, investment analysts report that UnitedHealth Group's ability to control medical expenses was the brightest spot in a strong quarter. Insurers measure the money they pay providers (costs) with what’s called a medical loss ratio (MLR). In the second quarter, UnitedHealth spent 82.2 cents of every dollar in premium revenue on care. The rest went to administration costs and profits shared with shareholders.

Most for-profit insurers have scaled back from the chaotic Obamacare markets, and instead are targeting steadier business such as Medicare Advantage. The program is still government-funded but isn’t in the political crosshairs of Republicans who want to repeal the Affordable Care Act.

If more insurers step away from the exchange plans available to the individuals and families who have purchased coverage through the public exchanges, and if smaller plans remain at risk for full liquidation mid-policy year bankruptcy, how should providers plan their contracted reimbursement strategy for the non-Medicare market?

As you read below, you'll learn about 5 important things you need to know, including:

1. how you can identify threats and assess risks in managed care agreements,
2. how to vet plan financial solvency
3. preferential creditor issues and mitigate the risk for repayment of previously paid revenues to bankruptcy trustees
4. how your organization might benefit from the payers’ inpatient insolvency protection insurance
5. sample contract language that works to protect your interests  

Risk and threat assessment

If you are a healthcare provider contracted with managed care plans you must review the language of your contracts to see what is mentioned about payer insolvency. Often, if insolvency is mentioned at all, a large number of contracted health plans attempt to negotiate in their contract for "patient indemnification and hold harmless" in the event of a plan insolvency. But how that section of the contract is written is the pivotal point in what gets paid, to whom, when, how much, and what's at risk.

Under the HMO Act of 1973, federal and state laws that mirror this provision require that a provider under contract indemnify and hold the patient harmless for Covered Services under the contract.

In some contracts, the plan asks that you honor this indemnify and hold harmless for a period of at least 12 months from the date of insolvency determination. No provider must grant this. What is required is that you do this for the term in which the premium has been paid. So that means that if the HMO premium was paid for the month of August, and the service and claim is incurred for an inpatient stay on August 25th, you might never be paid for services from the 25th through the 31st. There's a reason I say "might". Read on to learn about this important nuance.

Often HMO contracts are drafted in the fashion of an "all products" contract under the same terms and conditions. The law in most states in the USA does not afford this same indemnification and hold harmless to ASO, TPA, Workers' Comp, Motor Vehicle Accident insurance, most specific loss (e.g. cancer, etc.) indemnity insurance policies, or ERISA (for self funded employers), church plans, or labor union health and welfare benefit programs organized under the Taft Hartley Act.

If you sort this out during contract review, analysis and negotiation proceedings, you negotiate the hold harmless and patient indemnification provisions for HMO ONLY, and only for those plan participants who have paid an HMO subscription premium to the company, and limited to the term for which the premium or subscription fee has been paid, rather than for infinity or 12 months.

Risk mitigation

During due diligence, also request, in writing, information and clarification about any insurance that the plan may have for INSOLVENCY PROTECTION FOR INPATIENT CLAIMS. This protection by insurance might pay out those claims for inpatient charges, physician charges and anything associated with an inpatient confinement but only if you press the matter.

Your reaction to the insolvency notice

The filing of a bankruptcy petition automatically stops, or stays, all activities by creditors to collect an obligation against the debtor. 11 U.S.C. §362(a) The stay does not depend on notice to the creditor. It acts as a stay pending appeal without posting a bond, and it displaces a state court receiver. As a practical matter, if your hospital or clinic or healthcare business hears of a bankruptcy filing, even via rumors, it is best to halt collection activity until determining whether a bankruptcy has been filed. Violation of the automatic stay may result in the award of punitive damages and attorneys’ fees in addition to actual damages. 11 U.S.C. § 362(h).

However, secured creditors (which most healthcare providers are not) often seek relief from the stay to foreclose on their collateral (e.g. durable medical equipment, for example.) Grounds for obtaining relief includes that the debtor has no equity in the collateral and the collateral is not necessary to a reorganization. (Like a wheelchair or hospital bed rental, for example.) [11 U.S.C. §362(d)(2)(AB).] 

Reclamation allows a DME seller to recover product sold to an insolvent debtor within ten days of the bankruptcy filing as long as service of a reclamation demand is made on the debtor within twenty days of the date the product was delivered. [11 U.S.C. §546(c) and U.C.C. § 2702.] Reclamation also applies outside of bankruptcy, but the demand must be made within ten days of delivery, and usually, the creditor does not learn of the insolvency within ten days of shipment. Also another added complication is in reclamation of that hospital bed or wheelchair or scooter, or hot tub for arthritis or in-ground lap pool, for instance, "who is the debtor?" The patient? or the insurer?

Often in a bankruptcy proceeding, each provider, as an unsecured creditor, receives the bankruptcy notification letter that says "Sorry, we cannot pay you. We've declared our plan insolvent. Come to this meeting at the designated time and place for a creditors conference where you can ask us questions." At this point, a lot of hospitals write off the balances due, collect copayments and deductibles and lick their wounds. But there is a better way to handle this.

If a few plans do this over the course of any single year, the hospital will be in tremendous financial trouble. This is especially true if they:

• don't attend the meeting and just write off the outstanding debt
• don't know about the insolvency protection and don't negotiate for their share
• don't ask questions about how the insolvency protection money will be distributed, and
• if they accepted contract terms that caused them to extend the indemnification and hold harmless beyond the minimum necessary time period.

But I recommend one additional and precautionary step during the negotiation. That is to negotiate advance payment if certain triggers occur: Here is how the language I negotiate is worded

Vetting plan solvency

Available under most state's open records Acts, the insurance companies that are granted a Certificate of Authority to engage in the "business of insurance" must file quarterly and annual statements and reports. These are augmented by the states' Market Conduct Reports.

1. Obtain and scan the documents to look for and assess financial standing, denied claims trends, late paid claims trends, overturned denials, etc. These indicators tell you if the plan is having trouble settling claims.
2. Review reinsurance thresholds, and also review their debt to income ratios.
3. Obtain a statement from the plan, signed by an executive of the plan, that states that the plan is in good standing and knows of no current outstanding or unannounced matters that could lead to or heighten the risk of insolvency. An email from your provider relations negotiator is not sufficient. It must come from an officer with power to bind the organization. Often the pathway to a bankruptcy is a long arduous path that only gets announced publicly after the company is in dire straits.

Preferential Creditors and unsecured creditors

Most healthcare providers are unsecured creditors. They deal in services, not goods, so there's nothing to repossess. But there are many other steps that most of my clients, prior to hiring me to help them with their managed care contract analysis and negotiation, where largely unaware:

Obtaining a Judgment

Collection actions are commenced by the filing of a form complaint. A defendant health plan typically has 30 days after the service of the collection complaint to respond by filing an answer. If no timely response is filed, the healthcare provider or its agency or attorney may request a default judgment.

To obtain a default judgment, the creditor typically must file a request to enter default, and then file a motion to prove up the default and obtain entry of the judgment. If the defendant answers the complaint, the plaintiff will be required to carry his case to trial, unless there is no dispute regarding the facts surrounding an obligation, in which case, the plaintiff may be able to obtain a summary judgment.

When faced with financial problems, debtors often file general denials in response to collection complaints, which give them additional time to attempt to work their way out of their financial problems.

Obtaining a judgment may or may not result in payment, but if there is a chance you'll get paid, you'll get paid before the others who don't do this. Weigh the procedural and filing cost of obtaining the judgement against what is owed and your potential for recovery.

Provisional Remedies

A provisional remedy is an order entered that grants the plaintiff some protection that assets will exist when a judgment is eventually entered. The chief provisional remedy available to an unsecured creditor is an order for a writ of attachment, which operates to attach some asset of the debtor. The asset could be the proceeds from an insurance policy for insolvency protection for inpatient claims. The asset could be the number of member enrollees who will be auctioned off to another health plan which the provider may or may not already have a contract with. Each member enrollee may be "valued" at $150-$250 per covered life to the acquirer that prevails in the bankruptcy asset auction "on the courthouse steps". With your writ, you'll be entitled to some of these those proceeds. Without it, zip, nada, zero. Go start working on that massive write off.

Through the attachment procedure, the plaintiff can obtain a lien on one or more of the defendant’s assets while the complaint is prosecuted in court. If a judgment is eventually obtained, the judgment is considered secured by the attached assets as of the date of the attachment rather than the date of judgment.

In a health care setting, where a troubled insurer is likely to be under threat of being closed by the regulators, the prospect of attaching assets, such as a payroll account, might well prompt immediate payment of a past due amount on reimbursements due the hospital or healthcare provider. On the other hand, a wrongful attachment (i.e. an. attachment for a claim which is later disallowed), which forces the closure or the bankruptcy of the entity, could lead to enormous damages. Because of the drastic consequences of an attachment, great care must be taken in deciding on a strategy that could prompt the regulators to close the insurance plan involuntarily and declare it insolvent.

Another consideration in deciding whether to seek an attachment is the cost. There are many procedural requirements for attachments, but in a case where assets exist to be attached, and the healthcare provider is owed a substantial sum, an attachment is well worth the cost. However, obtaining an attachment may force the debtor into bankruptcy. For a troubled HMO or insurer, there are many technical defenses to a writ of attachment. You might ask your attorney how to word an affirmative snippet of text for your contracts that more or less disarms the HMO or insurer from using any of them.

Post-Judgment Remedies

Once a judgment is obtained, the healthcare provider must find and execute on nonexempt assets. One of the first steps is to conduct a computerized asset search, from a number of data services and search firms, including Information America and Lexis. These searches can reveal if the debtor owns any real property. These subscriptions are not free to use, but most attorneys have a subscription.

Once assets are discovered, the judgment healthcare creditor must move as quickly as possible to secure the judgment amount by property of the HMO or insurer. There are numerous mechanisms for perfecting the judgment by recording liens on various assets owned by the HMO or insurer. Remember: every premium-paying covered life is an asset, each software program and personal tangible property (e.g., computer terminal, desk, telephone, printer, etc.) are also assets.

For example, in California, a judgment creditor can record an abstract of judgment in a county recorder’s office, which creates a lien in favor of the judgment creditor on all real property located in that county. Cal. Civ. Proc. Code §674. It also acts as a lien against real property to which the judgment debtor may obtain title in the future. In addition to abstracts of judgment, judgment creditors can usually become secured by all the personal property owned by a judgment debtor through a filing with the Secretary of State, and can execute on specific assets that are discovered by obtaining writs of execution issued by the Court and enforced by the applicable authority, typically the local sheriff.

Speed is especially important when one considers that once a company begins to allow judgments to be entered against it, such companies are likely candidates for bankruptcy. By securing a judgment, the creditor can move ahead of the defendant’s other creditors, as long as the security is obtained more than ninety (90) days prior to the bankruptcy filing (see below for discussion of preference issues).

If assets are not readily available, the creditor can also examine a principal of the judgment debtor under oath as to its assets. Third parties owing money to the creditor can also be examined. After these examinations, the creditor again must move very quickly to attach or levy on any available assets. This is all part of the due diligence phase and results in the letter of good standing I alluded to before that must be signed by an officer with the capacity to bind the company - not your provider relations representative and contract negotiator. Cause them to assert that there is no known concern or issue announced publicly or unannounced. Your non-disclosure promise covers this in case they try to argue that they are under no obligation to share proprietary matters with you. Expect the attempted blowoff on this, especially as to the unannounced threats and risks.

Receivership

In the health care area, where preservation of the value of a insurer or HMO as a going concern is often the only mechanism for being paid, the appointment of a receiver may be the best solution to prompt payment of an unsecured claim that has been reduced to a judgment. I have a different tact that I will share in an upcoming section.

Limited Collection Strategy

Instead of immediately seeking an attachment on an asset, which is essential to the debtor’s survival, or a receiver after entry of judgment, the judgment creditor could take limited collection action. For example, recording an abstract of judgment (to become secured by any real property owned by the debtor) and filing a notice of lien with the Secretary of State (to become secured by the personal property), are non-obtrusive collection actions, which might not prompt the bankruptcy filing. If 90 days elapse (the bankruptcy preference period for non-insiders, see below) before the debtor seeks bankruptcy protection by filing a chapter 11 case, the judgment creditor enters the bankruptcy as a fully secured creditor as opposed to an unsecured creditor, and might recover 100% of its claim as opposed to little or nothing.

In collecting from a insurer or HMO, one must constantly examine the impact of collection activities on the going concern value of the business, as well as the ultimate priority of payments in a chapter 11 bankruptcy case. But if the choice is survival versus standing down, I would seriously consider letting the chips fall where they may, if your contract terms and conditions are all buttoned up - and your competitors' contracts are laden with risks stemming from inaction and ignorance. This is often where my clients find hidden value in my work on contract analysis and negotiation for them. Especially in the case of rural and critical access hospitals and also in the case of academic medical centers and research centers contracted with health plans.

The letter I mentioned above from the health plan executive is written to address specific warranty as to the truth of the testimony, and if hidden assets are later discovered, that any amount written off might be reinstated as a claim. Ask your attorney for help with this. I would not be the one to help you on this. I would initiate the dialogue between my client and their attorney to specify what I am asking for - the attorney will know what to do from there. If I did it, even if I know how, since I am not an attorney, but have paralegal training, I would be exposed for unauthorized practice of law (UPL). I don't cross that line - ever!

Involuntary Bankruptcy

The U.S. Bankruptcy Code allows three creditors (one if the debtor has less than 12 total creditors) who have claims that aggregate in excess of $10,000, to file an involuntary bankruptcy case. [11 U.S. C. §303.]

If regulators are about to close a an insurance company or HMO because of insolvency, unsecured and undersecured creditors probably have an identity of interest in moving quickly to file an involuntary chapter 11 and move immediately for a chapter 11 Trustee, who may have more credibility with the regulators. Sometimes, a health plan can create phony "alter egos," and transfer funds among its other entities and bank accounts to avoid creditors’ liens. The courts punish this behavior if the plan gets caught doing it and can subject the insurer or HMO to significant penalties. 11 U.S.C. § 303(i) (if bad faith is shown, can include punitive damages). 

Preferential Creditors

The Bankruptcy Code grants certain types of creditors’ priority in payment over unsecured creditors, and, in some cases, secured creditors. The first priority involves "administrative claims." These claims basically include the post-petition expenses incurred by the debtor and post-petition professional fees. Lower in priority are certain types of pre-petition employee claims and pre-petition taxes. 11 U.S.C. §507(a)(1-9).

These priority claims are typically subject to any liens held by secured creditors. However, those administrative expenses incurred to protect a secured creditor’s collateral may sometimes be charged against the secured creditor. 11 U.S.C. §506(c). 

If a hospital or healthcare creditor accepts 40% in full satisfaction of its claim, executes a mutual release of all known or unknown claims, and if the insurer or HMO then files bankruptcy in the next 90 days, it is very likely that the hospital or healthcare creditor will be sued by the insurer, HMO or by a successor trustee for a preference in the amount received. The hospital or healthcare creditor would have to return the money it received. In this case, however, the amount would be limited to the 40% paid, and not the full 100% claim amount because of the mutual release. Don't forget that release. It is more important to you than the check you receive as payment.

To avoid this result, the release should have a "pop up" feature that revives the full claim if the creditor is later forced to disgorge the preference. Second, one can be somewhat creative in attempting to document a settlement to avoid the preference risk. Insiders are subject to a one year preference period as opposed to a ninety day preference period so how your contracts are written indicates if you are then considered an "insider" or an "outsider" in the relationship.

Most of my clients hear this for the first time when I mention it. I see everyone's face wrinkle up in my Master Classes and seminars the first time they hear that as a healthcare provider they could settle for a lower amount and then have to pay what they fought so hard to get paid back to a successor trustee in the bankruptcy.

Integration Clauses

Beware of informal settlement negotiations. The debtor may later answer the collection complaint by stating that the insurer or HMO defaulted on an oral agreement to give the defendant more time to repay the obligation. Any workout agreement should be in writing and include a detailed integration clause that supplants any prior oral discussions under the Entire Agreement provision of the contract.

Escrow option

I always try to negotiate this following language into contracts for my clients. It protects them from all the above procedural nightmares by setting claims with money set aside in an escrow account.

"If offering entity or employer-sponsored self-funded plan is at risk for cost of enrollee claims, without backup reinsurance insurance, offering entity shall provide in formation regarding reinsurance demonstrating that the Plan can and shall at all times maintain net equity (assets minus liability) equal to at least one (1) month's average payments under this Contract, the dollar amount which shall be disclosed in compliance with the requirement. In addition, the offering party and any payers with significant market presence who may access the offering entity's discount and have responsibility for payment of beneficiary claims at PROVIDER shall be required maintain a current ratio (current assets/current liabilities) of greater or equal to 1.0.

If offering entity or employer-sponsored self-funded plan is at risk for cost of enrollee claims, without backup reinsurance insurance, offering entity shall provide in formation regarding reinsurance demonstrating that the Plan can and shall at all times maintain net equity (assets minus liability) equal to at least one (1) month's average payments under this Contract, the dollar amount which shall be disclosed in compliance with the requirement. In addition, the offering party and any payers with significant market presence who may access the offering entity's discount and have responsibility for payment of beneficiary claims at PROVIDER shall be required maintain a current ratio (current assets/current liabilities) of greater or equal to 1.0.

If at any time the offering party does not meet the minimum financial viability standards required, the Plan shall obtain Reinsurance that meets all federal and state of ___________ insurance authority requirements.

In addition, should the above occur, and Self-funded Plan not have adequate reinsurance coverage, in the sole and absolute discretion of PROVIDER, Plan shall provide an advance payment amount to the PROVIDER or provider as an advance against claims for services occurring on and after the Effective Date. PROVIDER shall be entitled to draw against the advance as services are rendered and claims are incurred.

PROVIDER shall provide to Plan, any necessary documentation of such 'draws against the advance, and Plan shall have the ability to contest such a draw only on the basis of enrollee eligibility and /or lack of coverage under the contract. Upon written notice from PROVIDER, Plan agrees to replenish the advance by wire transfer to PROVIDER’s named bank account to the extent that it has been drawn down. If such replenishment cannot be made, the contract terminates immediately."

Again, expect push back during negotiations, but don't capitulate on this if the money you expect to be paid is critical. Especially expect push back on the the requirement of notice if the current ration of assets to liabilities is greater or equal to 1.0 because the health plan will say that this is proprietary and confidential. So what! You pledged your confidentiality elsewhere in the contract. They cannot hide behind that multi-syllabic word "proprietary" unless you don't require the duty of notice in this case.

Let's talk

Have you ever felt helpless when you received a notice about a bankruptcy from an insurer or HMO? Would you like to improve your leverage and position on this risk exposure as the chaos of the Trump presidency and its repeal and replace efforts continue? Now would be a great time to consider your contracted reimbursement strategies for the downstream with the upstream approaches I've shared in this article. Naturally, your situation could be different and this article reveals these issues for your consideration in only the most general terms from an educational (non-prescriptive) perspective.

I can help you plan to deal with the chaos by better planning, best practices, and tweaks to your contract language. But you have to make the first move. I don't cold call hunting for project assignments. I've never done so in more than 35 years as a consultant. Or, alternatively, you could just continue with the frustration and suffer the write offs. The choice is yours.

Oh, and one parting comment, if your billing service is contracted to review and negotiate your managed care agreements, why not call them right now and ask them about the points you just learned in this informative article. See how aware they are of these details and ask in no uncertain terms how they manage and mitigate this risk for you. Then you can decide to share the article with them or pull that duty back from them and reassign it to someone better prepared to deal with these issues. Simply sharing the article at this high level will require them to learn more requiring years of study and practice. It's your risk. You decide.

About Maria Todd

Chief Executive Officer at Mercury Healthcare International, Inc.

Clients dramatically improve their healthcare operations, business growth, and profitability after working with Maria Todd. They realize benefit to reimbursements, volumes of new patients, and health plan brand value resulting in higher reimbursements and patient steerage.

Maria is the author of the best selling handbook on managed care contracting, now in second edition. Her unique skill set comes from over 35 years of experience at all six seats at the table, clinical, administrative, insurance contracting, healthcare marketing and branding, and health law paralegal work. She intertwines these skills in a way that no other consultant can offer because most usually only offer one of these expertise and have to call upon others - each with their own fees and expenses to comprise the other five. She solves problems for clients and shortens time and reduces expenses associated with hiring a consultant. This is an additional value added benefit of working with her.

Maria adds value to every project she accepts. If she doesn't believe she can add value, she turns the project down. She loves watching her clients' successes and watching them grow and thrive. She is also brutally honest with clients which they tend to appreciate when working with her. She is direct. She pulls no punches and doesn't sugar coat bad news or constructive criticisms.

Reach out to her to at +1 (303) 823.4662 (office international land line) or by email. Maria accepts most invitations to connect with her on LinkedIn. You can also follow her professional Facebook page. Initially, Maria prefers direct email to her @mercuryadvisorygroup.com address or through LinkedIn for all contacts via email.